AI Drafter 
TaxTMI 
TaxTMI 
2018 (5) TMI 631
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....confirming the action of the Learned Assessing Officer in disallowing the provision for warranty expenses amounting to Rs. 37,87,010/- without appreciating the fact that the same is an ascertained liability and has been calculated based on technical estimates. 1.1. That the Ld. CIT (Appeals), has erred on facts and in law, in not appreciating the decision of Hon'ble Apex court in the case of Rotork Control India Private Limited vs. CIT (314 ITR 62) and the Delhi High Court in the case of CIT vs. Vinitec Corporation Pvt. Ltd. (278 ITR 337) 2. That the Ld. CIT (Appeals), has erred on facts and in law in levy of interest under section 234C of the Act. 3. That the Ld. Assessing Officer has erred in initiating the pena....
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....s of the assessee and submitted that warranty expenses provided by the assessee is not on scientific basis in compliance of the accrual basis of accounting and hence is not allowable as deduction whereas the assessee has also not submitted the said expenses calculated on any scientific basis but have been determined on the basis of the costs liable to be incurred in relation to warranty obligation contracted with respective customers. He further held that the provision of warranty expenses is not an allowable deduction in view of the note given by the auditors in the audit report in clause (f) of the report. He further held that provision made by the assessee is a contingent and is not a liability in present. Therefore, he disallowed the ex....
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....in this year it is 0.21%. Therefore, he submitted that the provision of the warranty made by the assessee is based on reliable estimate based on experience. He therefore submitted that warranty expenditure provision made by the assessee satisfies the conditions laid down by the Hon'ble Supreme Court in the decision of Rotork Controls (India) Pvt Ltd. He therefore submitted that the Ld. lower authorities have failed to appreciate that there is no arithmetical formula, which can apply to each and every industry identically in the case of provision of warranties. He further submitted that assessee is engaged in the business of trading of telecom equipment and provision of installation and commissioning services. The warranty is related to the ....
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....e appellant to provide the services is inbuilt in the contract for the sale and services only. Therefore, apparently assessee is supposed to incur certain expenditure over the period of warranty claim contract. The assessee made a provision based on the inputs from technical team for each customer contract having regard to the nature of the products supplied and installation services provided. According to the assessee, it takes into account the labour cost, material cost and other technical services cost expected to be incurred to meet the warranty obligation with respect to these customers. Undoubtedly, the revenue earned during the year is credited to the profit and loss account of the year and the corresponding warranty provision expend....
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....ss account. The Ld. Lower authorities has considered the claim of the assessee and held that it is not based on any scientific methodology. However, the assessee has stated that it is received input from its technical team which is most competent to see what kind of expenditure is required to be made for the purposes of fulfilling the warranty obligation embedded in contract with the customers. Therefore, whether the provision of the assessee of warranty expenditure is reliable estimate or not the lower authorities should have looked into the basis of the estimate made by the assessee. It is further required to be seen that what kind of expenditure have been incurred by the assessee in subsequent years that will give the best picture with t....
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....e of the Ld. assessing officer with a direction to the assessee to prove before the Ld. AO how the warranty provisions have been made by the assessee along with the technical inputs received from the technical team of the assessee. The Ld. AO may examine the above claim and then decide the issue afresh on merits after giving assessee a reasonable opportunity of hearing. In the result ground No. 1 of the appeal of the assessee is allowed with above direction. 10. The ground No. 2 and 3 of the appeal of the assessee is with respect to the levy interest under section 234C of the income tax act which is consequential in nature and further initiation of the penalty proceedings under section 271 (1) (c) of the act. As the chargeability of inte....